HealthEquity, Inc. (HQY) Q2 2027 Earnings Report, Transcript and Summary

Good day and welcome to the HealthEquity Second Quarter 2027 Earnings Conference Call. [Operator Instructions] Please note that today's event is being recorded. I'd now like to turn the conference over to Richard Putnam with Investor Relations. Please go ahead, sir.

Thank you, Rocco. Good morning, everyone. Thank you for joining us for HealthEquity's Second Quarter Fiscal 2027 Earnings Conference Call. As Rocco said, my name is Richard Putnam. I do Investor Relations for HealthEquity. Joining me today are Scott Cutler, President and CEO; Dr. Steve Neeleman, Vice Chair and Founder of the company; and James Lucania, Executive Vice President and CFO. A press release announcing our second quarter financial results was issued earlier this morning and includes certain non-GAAP financial measures that we will reference. You can find a copy of today's press release, including reconciliations of these non-GAAP measures with comparable GAAP measures, on our Investor Relations website, which is ir.healthequity.com. Our comments and responses to your questions reflect management's view as of today, August 27, 2026, and will contain forward-looking statements as defined by the SEC, including predictions, expectations, estimates, or other information that might be considered forward-looking. There are many important factors relating to our business which could affect our results. These forward-looking statements are subject to risk and uncertainties that may cause our actual results to differ materially from statements made here today. We caution against placing undue reliance on these forward-looking statements, and we also encourage you to review the discussion of these factors and other risks that may affect our future results or the market price of our stock as detailed in our latest annual report on Form 10-K and subsequent periodic reports filed with the SEC. We assume no obligation to revise or update these forward-looking statements in light of new information or future results. Before I turn this call over to Scott, I want to cover three brief updates. First, we recently launched Investor Answers, an AI-enabled tool on our Investor Relations website that makes HealthEquity's disclosed materials easier to search and navigate. You can find this on the menu of our Investor Relations landing page, and we welcome your feedback as we continue to improve the experience. Second, as a reminder of the cadence we set last year, we expect to publish year-end sales metrics after the conclusion of our January 31st fiscal year, and we will provide fiscal 2028 guidance when we report our fiscal 2027 year-end financial results. And finally, we're excited to welcome you to our Draper headquarters for our next Investor Day. It's scheduled for April 13, 2027. Please save the date, and we will share additional information and details as we get closer. With that out of the way, let's turn the call over to Scott.

Thank you, Richard, and welcome, everybody. We appreciate you joining us this morning, and I'm really excited about Investor Answers and look forward to hosting many of you at our Investor Day in April. Turning to Q2, our results build on the momentum we reported in Q1 and show the HealthEquity model scaling with greater durability. We delivered accelerated revenue growth and higher profitability, including a record adjusted EBITDA margin of 48% and raised fiscal 2027 guidance. It was also a quarter of strong execution across the business with growing marketplace activity, continued technology-enabled efficiency, and lower service costs as HSA accounts reached a record 10.7 million. The key takeaway is simple. Q1 demonstrated that the model is scaling, and Q2 showed that the model is becoming more durable, supported by stronger operating cash flow and disciplined capital allocation. The strength of our model is especially important in a market where healthcare affordability remains one of the biggest financial challenges families face. Healthcare costs are projected to rise at a near double-digit rate next year, adding to the responsibility already being placed on consumers, employers, and health plan partners. Against that backdrop, HealthEquity's role is increasingly important, helping members save, spend, and invest with greater confidence while helping clients manage healthcare costs more effectively. Our strategy is to continue evolving our scaled platform into a healthcare financial operating system that connects accounts, assets, payments, investing, marketplace, and advisory capabilities in one integrated experience. Our second quarter results show the acceleration of that evolution across three drivers: accounts and asset growth, deeper engagement, and technology and AI-enabled efficiency. Let me start with account and asset growth. In the second quarter, we continued to see strong HSA momentum across accounts, assets, and sales. Total HSA assets were up 14% year-over-year. Total HSAs grew 8%, and new HSAs from sales grew 24% year-over-year. New HSAs from sales set a Q2 record and marked our strongest quarter outside of the Q4 open enrollment period. Client retention remains strong amid a very busy contract cycle, with renewals once again on pace to be well above 90% for the year, supporting our confidence in the category and our pipeline. This matters because account growth is only the starting point. As accounts mature, members can use more of the platform over time, expanding the value of each relationship. That creates a more durable model by adding growth opportunities beyond new account volume in any single year. Second, members are engaging more deeply as they save, spend, and invest. Monthly active users on the app reached 1.4 million in July, up 62% year-over-year, while total app downloads exceeded 5 million. Mobile is increasingly the front door of member engagement. We plan to build on that momentum with our next-generation app, which we expect to roll out in the coming months. The app is designed to make it easier for members to access all of their HealthEquity accounts in a single location, find relevant education, manage reimbursements, and connect to marketplace, all while lowering cost to serve. We believe it will help members make more personalized, confident decisions while giving HealthEquity better insight into member needs and more ways to serve them. Marketplace extends that member experience, connecting members to health and wellness solutions. At the end of the quarter, Marketplace had more than 14,000 active members with continued month-over-month growth as we began more targeted member campaigns. Since our prior earnings call, Marketplace has broadened across more categories, merchants, and member touchpoints. Our health-related categories now include metabolic health, hormonal health, diagnostics, consumer health devices, skincare, and recovery. We're adding merchants to support these offerings and developing additional categories, including sleep, health vision, and pediatric care, which we believe expands marketplace to meet more household health needs. We've also begun testing promotional campaigns, including Health Savings Days, which drove record marketplace activity last week. These campaigns are helping increase awareness, drive traffic, and conversion, while giving us additional insight into member demand and the levers that can scale member adoption. While Marketplace revenue is immaterial to our overall financial results today, purchase activity and subscriber growth are encouraging and meaningful signals. Early analysis of HSA members who were not previously contributing shows marketplace purchasers were more likely to begin contributing than comparable members who had not made a marketplace purchase. These signals give us greater conviction that a stronger app experience and relevant marketplace offerings can move members from account ownership to deeper engagement, expanding the long-term value of each relationship. Investing is another measure of deeper engagement and an area where we reached new records in Q2. We ended the quarter with a record number of investing HSA members of 20% and record HSA invested assets with invested asset balances up 28%. HSA members who invest tend to hold larger balances, have higher average contributions, and show higher engagement in spending over time, increasing the long-term value of the member relationship without requiring a new account to be opened. With approximately 9% of our total HSA population investing today, we see a substantial opportunity to help more members realize the full tax-free growth benefits of their HSA. To support that opportunity, we recently launched SimplyInvest, an investment lineup with no administrative fee, designed to make HSA investing more competitive and accessible. The same principle applies across our technology investments. We are improving the member experience, strengthening security, and lowering costs to serve by simplifying workflows, increasing automation, and creating more operating leverage. AI is a key part of that work. We are extending it across a broad and growing set of workflows, moving quickly from concept to implementation while managing costs with discipline and tying those investments to measurable outcomes. In open enrollment, for example, we're using AI to support a digital client onboarding experience and the development of custom multilingual materials, reducing manual work while improving speed, consistency, and the ability to support our clients at scale. In service, AI-driven automation continues to drive down service costs per account across our client member organization. In targeted workflows, AI helped resolve 85% of routine chat inquiries and contained 55% of card-related phone contacts. Enhanced self-service capabilities and operational efficiencies helped reduce human-handled calls 25% year-over-year, with card-related calls declining even faster at 30% year-over-year. AI is helping us strengthen security. Fraud loss remains significantly below target. At the same time, card acceptance improved, and service costs continue to benefit from stronger prevention, automation, and secure mobile adoption. For members, that means simpler self-service for routine needs. For clients, it means less administrative complexity. For HealthEquity, it means a more scalable operating model. This is the operating leverage story in action. Better service, stronger security, and lower cost to serve all moving together. Across the business, account and asset growth, deeper engagement, and technology-enabled efficiency are expanding the value of existing member relationships, improving scalability, and increasing confidence in the durability of our model. We are increasing investments in areas where we are seeing momentum, including digital engagement, marketplace, brand, marketing and promotional campaigns, investing adoption, and service automation. Strong operating cash flow gives us the flexibility to fund those growth investments, maintain capacity for strategic opportunities, and return capital to shareholders. With that, I'll turn it over to Jim to walk through our second quarter financial results, including our margin performance, capital allocation, and raised fiscal 2027 outlook.

Thanks, Scott. Hi, everyone. I'll review our fiscal 2027 second quarter GAAP and non-GAAP financial results, then provide more detail on our balance sheet, capital allocation, and raised outlook. Reconciliations of GAAP measures to the non-GAAP measures are included in today's press release. Second quarter revenue growth accelerated to 8% year-over-year. Service revenue was a record $124.4 million, up 6% year-over-year, supported by account growth and the increased engagement Scott discussed, including growing marketplace activity and invested HSA balances. Custodial revenue grew 10% to a record $175.9 million. Annualized yield on HSA cash was 3.83%, reflecting higher replacement rates and increased participation in enhanced rates. Interchange revenue grew 5% to $50.4 million, reflecting higher member spending and transaction activity. Gross profit was a record $258 million, or approximately 74% of revenue, compared with 71% in the second quarter last year. As Scott mentioned earlier, our technology and use of AI have driven down service costs on a per-account basis, as is our goal every quarter, and delivered meaningful service cost reductions year-over-year while total accounts grew 4%. Net income was a record $65.6 million, or $0.78 per diluted share, on a GAAP basis. Non-GAAP net income was $103.8 million, or $1.24 per diluted share. These results include $3.3 million of one-time disposal expense related to previously capitalized, internally developed software that's no longer used. We continue to expect full-year tech and dev spend to remain within our target range while continuing to fund the growth initiatives Scott outlined. Adjusted EBITDA was a record $167 million, up 11% year-over-year, and adjusted EBITDA margin was 48% compared with 46% in the second quarter last year. For the first six months of fiscal '27, revenue was $705.4 million, up 7% compared with the first six months last year. GAAP net income was $135.1 million, or $1.60 per diluted share. Non-GAAP net income was $208.9 million, or $2.47 per diluted share, and adjusted EBITDA was $331.5 million, up 14% from the prior year, resulting in 47% adjusted EBITDA margin for the first half of this fiscal year. Turning to the balance sheet, we ended the quarter with $256 million in cash, generated $136 million of operating cash flow, and had approximately $931 million of debt outstanding net of issuance costs. During the quarter, we repurchased approximately $108 million of our outstanding shares at an average price below $90. At quarter end, we had approximately $948 million remaining under the $1.6 billion cumulative share repurchase authorization. We expect to remain disciplined and active in our share repurchase program, as we believe it represents an attractive use of capital, while continuing to fully invest in the business and preserve flexibility for strategic opportunities. Before discussing our raised guidance, I want to briefly address the HSA cash maturity schedule included in today's earnings release. We have $2.3 billion of remaining HSA cash in contracts repricing in fiscal 2027. During Q2, $460 million of forward Treasury contracts matured, and we ended the quarter with $3 billion of outstanding contracts, effectively locking a five-year Treasury rate at approximately 3.9% net of costs across fiscal years 2027 through 2029. With current five-year Treasury yields higher than our average locked forward rates, we remind you the purpose of this program is to reduce volatility and narrow the range of potential outcomes tied to movements in the five-year Treasury benchmark. After quarter end, we placed small forward contracts tied to enhanced rate repricings expected over the next 12 to 18 months. Because these forward contracts are tied to future depository contract maturities, we have greater visibility into the economics of custodial cash placements. We'll continue to evaluate additional forward hedges as appropriate. We now expect average yield on HSA cash to be between 3.85% and 3.9% during fiscal 2027. As a reminder, our custodial yield assumptions are based on projected HSA cash deployments and rollovers, the schedule of which is contained in today's release, remaining forward contracts in place, as well as analysis of forward-looking market indicators such as the Secured Overnight Financing Rate and mid-duration Treasury forward curves. These indicators are subject to change and may not accurately predict future market conditions. We remain optimistic about fiscal 2027 and are raising our guidance, reflecting the strong revenue and margin performance in the first half of the year. Our outlook also reflects the benefits of our ongoing technology and security investments that are improving efficiency, reducing service costs, and supporting a better member experience. For fiscal 2027, we now expect revenue between $1.411 billion and $1.421 billion. GAAP net income of $242 million to $248 million, or $2.88 to $2.96 per share. Non-GAAP net income of $392 million to $398 million, or $4.66 to $4.73 per share based upon an estimated 84 million shares outstanding for the year, and adjusted EBITDA between $628 million and $636 million. Our guidance also reflects funding growth initiatives in the second half of the year, expected capital allocation activity, including additional share repurchase under the expanded authorization, and potential reductions in revolver borrowings during the year. With continued strong cash flow and revolver availability, we expect to maintain ample capacity for portfolio acquisitions should attractive opportunities become available. We assume a GAAP and a non-GAAP income tax rate of approximately 25%. As in prior periods, our fiscal 2027 guidance includes a reconciliation of GAAP to the non-GAAP metrics provided in the earnings release. Definitions of all of these items are included at the end of the earnings release. In addition, while amortization of acquired intangible assets is being excluded from non-GAAP net income, the revenue generated from those acquired intangible assets is included. And with that, operator, please open the line for questions.

[Operator Instructions] Today's first question comes from Allen Lutz of Bank of America.

Scott, I'll start with you. Really impressive growth in active members in the marketplace. I saw you quoted 14,000 active members exiting the quarter. I know you said that the service revenue around those marketplace members wasn't material. But if we look at the model here, typically service revenue is down sequentially from Q1 to Q2, and now it's stepping up. Is there anything else in that line item we should think about that's maybe different about this quarter versus in prior years? And then more broadly on the marketplace, can you share any feedback or early learnings, just any conversations with partners or anything that you're learning in real time, either about the opportunity or about what you're trying to do with the marketplace?

Yes, great, Allen. Great question. So, as we think about what's driving effectively this inflection in service revenue, it's the things that we're strategically focused on, marketplace and driving more investors, both of which we saw exceptional growth on a year-over-year basis and into the quarter. So for me, it's really that perspective that driving that strategy should, again, continue to drive service revenue. Going to your question around Marketplace, yes, we're really pleased with the subscriber growth, the transaction growth, and what's happening in Marketplace specifically. Connecting it to the next-generation app, as we're rolling that out in the coming months, we've spent time with our customers reviewing what that app experience is going to look like and also getting feedback, particularly on what the UI looks like for the entire app experience, including Marketplace. And so the early feedback and learnings is they're finding it, they're seeing it, and they're appreciating the connection to wellness and health that Marketplace is really designed to drive. The other early learnings, and again, we're seeing month-on-month growth in Marketplace, but a couple of exciting things. I talked about Health Savings Days last week. It drove the highest traffic and the largest sales week in marketplace history, and recognize we're only three quarters into this. Just last week alone, we drove 500,000 unique visitors to the site, which we're really excited about. Most of those transactions are happening in the mobile experience. We also have it available on web. And I think the other thing that I'm really pleased about is that when we look at the revenue composition of marketplace, we started in metabolic health and now we've expanded our inventory across more programs, more products, and more services, and now non-metabolic programs and transactions are now about a third of that Marketplace revenue. So, again, early indications are very positive. The feedback from our members and our clients is improving, and ultimately connecting that health outcomes and driving health outcomes for our members is really exciting right now.

Great, appreciate that. And then a follow-up for Jim. As we look at the growth in interchange revenue and the growth in HSA members, I wanted to dig into interchange revenue in the quarter. The growth there was maybe a little bit more disconnected than normal from member growth. Jim, is there anything going on from a utilization perspective as we think about this past quarter? I know there's a lot of volatility. Last quarter, there was impacts from weather that impacted things more broadly, but anything in the quarter that you saw around utilization that's worth calling out?

Yes, no, thanks. Yes, it's not just HSA members that have cards, right? It's really all members except for COBRA members. So in line with the total account growth of 4%, it grew faster than account growth. So I'd say actually Q2 was a bit more of a normal quarter in interchange growth, so seeing reasonable spend growth. We see a little bit of behavior change only in the way that people are spending, so, like, the mix, so mix of online purchases versus in-doctor office purchases versus CVS drugstore purchases in store, each of those have, like, slightly different pay rates, but that's just sort of at the margin stuff that swings quarter-to-quarter, but we view this quarter as a little bit more normal, not like last quarter where, yes, we definitely saw some sort of off-trend shifts. So, you know, we'll continue to watch it. But like I said, this quarter was a bit more normal growing with account growth.

Our next question today comes from Alexei Gogolev with JPMorgan. Please go ahead.

I had a question around distribution strategy. So how are you balancing reliance on network partners with selling direct, and over time, do you want to be more partner-led or more direct, or maybe remain hybrid?

Yes, thank you, Alexei. So, as we think about our go-to-market strategy for driving account growth, we do have an incredible network of partners that enable us to have a very efficient distribution strategy. So, we continue to leverage our hundreds of health plan partners, our relationships with the brokers that tend to have an advisory relationship with many of their clients, as well as going direct. And so all of those channels are working exceptionally well. We are very, very pleased with what we've been able to drive so far this year with a record Q2, for example, in new HSA sales. And I think that's representative of a couple of different things. Number one, our growth from existing clients is actually quite strong because we're going to the market in an advisory capacity to help them drive plan design and improvements to drive greater adoption, so growth from existing very strong. What we'll talk about in terms of what we call individual family plans we used to call retail is really driven by health plan partners that are driving bronze adoption, our direct-to-consumer flows, our relationships with other providers and brokers in that go-to-market strategy, and then also the third would be new logo sales, which again, we go with partners as well as direct, and we're continuing to see really strong enterprise growth and sales pipeline as we look at how this develops through the rest of the year. So we're really excited by again an efficient distribution strategy and continuing to drive account growth, which is really just the beginning of the value of that relationship over time.

Thank you, Scott. And another question on data analytics. You often cite analytics as a differentiator and then the price wins. How do you envision monetizing analytics over time? Do you think it will be a standalone revenue line or maybe primarily as more like a win and retain capability?

Yes, another great question. We're leveraging insights and data and analytics across this network effect of network partners, all of the integrated claims and data that we have associated with that, as well as just a deep understanding of the largest installed client base in the industry to give us a comprehensive picture to our clients in what we call strategic advisory services. And what these services are really designed to do is to be able to have an advisory conversation with our clients to help them understand what is best in class and how do they compare against industry peers, for example, in things like enrollment, adoption, contribution, what could a seed or investment strategy contribute? All of this is really designed against a backdrop of a healthcare affordability for the enterprise that is a real challenge. And so as our enterprise clients adopt these strategies that we're giving to them, they're able to lower their annual increases in healthcare costs, attack that healthcare affordability with a real solution in driving greater adoption of a high-deductible health plan attached to an HSA. And ultimately, what we believe is giving more employees or more members power in their healthcare decisions when they have an account to address those needs. So I don't think it's going to be necessarily a standalone product, but all of that information is leveraged to be able to drive greater adoption and better advisory services to our clients.

Our next question today comes from Brian Tanquilut with Jefferies. Please go ahead.

First, as I think about the margin performance in the quarter, another strong performance here. So just curious, how much runway do you think do we have in terms of driving that margin higher? I know you're using a lot of AI and productivity tools in the model right now. So just curious about that.

Yes, I'll attack that. What you're seeing right now is obviously we're seeing gross costs come down while account growth is happening. So we're exceptionally pleased with what we're seeing. In terms of our ability, number one is providing a better service. A better service, ultimately, results in fewer contacts, higher satisfaction from our customers at a lower cost. What you're seeing in the numbers right now, again, is largely just a reflection of the improvements that we've been able to make in the member experience. So the things that we highlighted in terms of a 25% call reduction is phenomenal. Where we're seeing real improvement in AI-driven automated responses in things like chat, the containment of card-related phone contacts, and really this transition to self-service and automation. And then the human part of the interaction can be best served by those interactions that we can really drive even more value in a phone conversation. But what I would also say is while we've made great progress there, you'll recall that we've kind of identified it in three buckets. One, member services, two, client services, and three, back office. The results that you're seeing now is more on the member services side. What we're really transitioning to now is really what are the efficiencies that we can unlock on the client side and in back office. On the client side, we've introduced AI into certain of our workflows around client onboarding and file transparency, and we're continuing to drive back office efficiencies in claims automation. And in all of those areas, while we've been able to deliver really strong margin improvement, remember that we're just at the beginning of where we see AI driving even further efficiencies as we use AI across all of these workflows. And so I think that's what I'm equally excited about is that we're still just at the very beginning of this journey while we're delivering significant margin expansion, which is really exciting for the story.

That's awesome. And then maybe my second question, as you look over the next several quarters, what do you think are the biggest drivers of yield sustainability, and how should investors think about the balance between, say, portfolio positioning, contract renewals, and then interest rate sensitivity?

Yes, Jim, you want to take that?

Yes, sure. Not exactly sure where you're going on that one, but what the yield on the HSA cash portfolio is going to be, we have a pretty tight band, right? That's why we're able to give you a pretty tight band on a short-term outlook. We've got a pretty good idea of what next year is going to look like, but obviously with much more precision once we get through the open enrollment season and we know what the cash inflows and outflows are going to look like. But you're absolutely, like, if you're on the pricing trend, right, and to Scott's point on service costs, right, the magic is going to be in -- how much of the save do you share back with the clients in continued admin fee reduction versus how much of it we can hold on into the margin? So I think we've been striking a balance for some time in that area. There is absolutely headline price erosion, so that would be in the -- that's a headwind to service revenue, is year-over-year price reduction. Our competitors don't stand still either. They're going to be trying to reduce their service cost, and we're in a highly competitive market. So that's going to be the balance for us to manage the revenue share back with clients and the speed of cost saves that we can drive. So hopefully that was the direction your question was going.

Our next question today comes from Sean Dodge of BMO Capital Markets. Please go ahead.

Maybe, Scott, on the HSA account growth, you talked about the various channels you all go through, but if we focus on the intra-year adds, I think you said this was the best quarter in terms of adds outside of an open enrollment period. Is there something different you're doing to drive the intra-year growth, like how were you able to drive that?

Yes, it's all of the things that I suggested earlier, which is again the relationship that we have with clients. We're using strategic advisory services. That's the largest contributor to that year-on-year growth, essentially the channel of individual plans and individual participants, as well as new sales. All of them are actually working. All of them are strategic priorities, and just exceptionally pleased to be able to see new HSAs from sales growing 24% year-on-year. I think that's against essentially the perception maybe earlier in the year that the jobs market might be a headwind. I think what we've been talking about all year is that healthcare affordability is a massive tailwind for the business because it's a problem for enterprises, it's a problem for our members, and our solution is perfectly suited to address those needs. So to be able to have that level of growth in new accounts for this year, and again, hopefully the setup for the second half of the year is as strong as the first half is going to be, but certainly really pleased with what we're seeing so far.

Okay, great. And then on the other CDBs, growth in those accounts continues to lag HSAs, just with you all signing more multi-product deals, how should we think about like CDB growth going forward, and what kind of runway remains there in terms of cross-selling more of those into your growing HSA base?

Yes, remember that the HSA product is the most powerful product to drive value to the member, to the employee, to the client, to be able to also help drive down year-over-year healthcare costs by driving greater adoption. And also remember that the CDB products are all sold as a bundle. And so I think what we see is effectively that bundle is still being really important to our clients to be able to offer, again, a flexible array of accounts for their teammates and then for us to be able to drive the value of the health savings account, the triple-tax advantaged nature of that. And again, I think what you see from clients is largely reflection or movement of moving from other CDB products, particularly FSA as an example, into driving greater adoption of HSAs. And so I think that's been a trend that's been happening for a while, and certainly I think that's reflected in what we're seeing in terms of the overall portfolio of accounts.

Our next question today comes from George Hill at Deutsche Bank. Please go ahead.

I guess, Jim, I've got two quick ones. Jim, just wanted to check, was there anything one-time in the services margin contribution this quarter just because it seemed to handily beat our number and the street number as well, and maybe comment on the sustainability of that margin profile? And then my question for Scott is, we continue to read in the media everywhere about the affordability crisis in health benefits with employer sponsors and other planned sponsors looking to exit the market and exit the healthcare business. And we'd love to hear how that's influencing your conversation with customers and kind of the demand for services that they're seeing from you guys. I would imagine it's a tailwind to address affordability, but would just love to hear about the conversations.

Yes, thanks for the question. I'll handle the first part quickly, turn it over to Scott. Yes, so nothing weird in the service cost number for this quarter. So this is not, there is no year-over-year easy comp on fraud like there has been. So we continue to significantly outperform our fraud target, which is 1 basis point on assets per year, so a quarter of a basis point each quarter. So, yes, this reduction is sort of nice, clean, actual service cost reduction from our service and ops team.

Yes, so George, let me answer, and I'll ask Steve to lean in as well in terms of what we're seeing across the other several channels in the family plan market, which I think is part two to your question. So part one to your question around affordability is for every CEO and every CFO of public companies, you're actually seeing this healthcare line item grow on a year-over-year basis much faster than wages, much faster than GDP growth, and much faster than most companies are growing. And so it does create a real challenge within your benefits to effectively design a benefit program and be able to try and manage those healthcare costs. And there are things that our employer clients have in terms of levers to be able to drive that. And the single biggest lever that can actually amount to millions of dollars of savings for an employer and thousands of dollars of savings per employee is simply just driving greater adoption of high-deductible health plans. And we're on a journey with many of our clients that are driving much greater adoption because of that. So we've had clients that have moved from, call it a 25% adoption rate to higher than 60% and 70% and enjoy significant savings associated with that move. And so we do believe that the healthcare affordability tailwind is going to continue, that strategic advisory services is designed to be able to give those employers data and information to be able to go into this next open enrollment season with real strategies to address that. And then, so maybe Steve, you can talk a little bit around what we see happening in terms of employer plan sponsors in the individual market.

Sure. Hey, George. Good hearing from you. So, look, I mean, one of the benefits of having around 100,000 or more clients is we see all different types, right? We see large self-funded employers which have their ways to deal with this. Scott's really highlighted it, right? If they can go from a 30% adoption in HSAs, which is kind of the national average, to 60%, they save a lot of money every year per participant. At the lower end, I think because we have thousands and thousands of employers that are closer to that line, what are they doing? And we are seeing some movement towards things like ICHRAs where they're saying, look, we still want to provide benefits because we want to be able to recruit people, we want to be able to provide a benefit, we want to do it in some sort of a tax-advantaged and managed way, and so that's where they're starting to lean in and ask the questions, and look, there's been a lot of investment in the ICHRA market. I think what's made it very interesting to us is obviously the legislation that was passed a little over a year ago with bronze plans, catastrophic plans, being universally HSA qualified. Prior to that, we looked at the data when the law passed last July, and only 2% of people in health exchanges throughout the country were in HSA qualified plans. In some states now, with one law change, that number is now approaching 50% in HSA qualified funds in exchanges. So now the question is how do you get those people not only into health savings accounts, but how do you get them to fund those accounts? So that's where we're working a lot of different angles. I mean, we do have these wonderful health plan partnerships that all, most of them sell IFP plans. And so we're working with them to make it very simple for a member that, whether they're coming from an employer plan or they're just out in the individual market, they could be self-employed, whatever, get them into a bronze plan, get them into an HSA, get them funding that HSA. And we're learning some new muscles, thankfully there's some things that we can leverage our ability to market to consumers through the marketplace. We're learning that. And then there's of course the ICHRA channel. There's a lot of ICHRA providers that we're having very good discussions with and starting to contract with. And there's these field marketing organizations that are out signing up IFP members. And so we're looking at all these different channels. And there's even our direct-to-consumer market. And we're seeing some growth there. So we're all over it. I think Scott said it best. If people want to solve the affordability crisis in this country, whether you're an employer or you're a consumer, go sign up for a health savings account. And, you know, sometimes you need an affordability crisis. You know, never let a crisis go to waste. And we're not letting it go to waste. Trust us on that.

Our next question today comes from Scott Schoenhaus with KeyBanc. Please go ahead.

Scott, I believe you said in your prepared remarks you had record marketplace activity last week resulting from highly targeted campaigns. Can you talk about more in detail what you're doing here on the enhanced targeting side? And if you expect to see the activity and marketplace growth to further accelerate from here, given what you're seeing and doing?

Yes, great, Scott. We are literally at the very beginning of Marketplace, and we expect to grow Marketplace significantly over the years to come. I'd say what I'd highlight on the marketing side is, first, remember that it starts with the top-of-the-funnel experience, which is how do we drive engagement, how do we drive traffic? And this quarter was the first quarter where our marketing strategies, and it's largely personalization in the app, it's also email campaigns that were driving greater engagement of our members top of funnel, creating our own funnel of engagement all the way down to conversion. Technically, what's really important to be able to unlock that is making sure we've got enough surface area in the places that our members see to be able to see Marketplace as an offering, to be able to expand the inventory that we have, the brands that are part of Marketplace, and then start to improve conversion. And coming from a marketplace background of the last several years, what I'm really excited that our team is able to deliver this last quarter is really beginning the start of journeys around A/B testing, UX insights, promotional campaigns to start to test and to learn what activities produce the greatest results. And so when we see increased traffic and increased transactions and increased conversion, all of those are going to continue to drive exceptional growth in marketplace. And so I know that we're just at the beginning. And certainly as we look forward into the brand pipeline, we're also building a merchandising function. So we've got team of folks that are adding other brand partners. We're making that process easier and more efficient, which is sort of like building the supply side of the marketplace. And as I highlighted in the first question, to be able to see that mix of products and programs, to be able to expand in just one quarter, we're really excited about that. So I think all of those are key things that we're doing now to be able to effectively use our marketing mechanisms as well as our UX and inventory to drive these results.

And then just to follow up here, it kind of leads me to my next question. How should we think about the margins evolving for consumer marketplace? You know, they obviously tend to be very high margin business that drops to the bottom line, but you're also investing in these marketing campaigns and targeted areas. So maybe think of us how we should be thinking about modeling how this business falls.

So the margin profile of our marketplace is dramatically different than any other consumer marketplace that is available. And it's really in two areas. Number one, there's largely no cost of acquisition because our cost of acquisition is really driven by the mechanics of driving member engagement of our own members, and so we're not actually needing to spend dollars which other consumer marketplaces need to drive with Google or Facebook or other top of funnel activities to actually get a transaction. We have an installed base of 18 million members that have accounts with us to be able to have a personalized experience. So number one differentiator is cost of acquisition, which for us is very, very low. The second thing is the cost to serve associated with that, remembering that some of our biggest programs are here through partners, and the delivery mechanism is through partners, so we don't really have any cost to serve that revenue as well. So I would expect Marketplace, as we're able to drive it, is contributing significantly large margin profile associated with that, but also very, very different than any other marketplace could offer. One another example of that in Health Savings Days, we're able to drive really great pricing. So pretty much market-leading pricing across all of the products and programs that we were selling over the course of Health Savings Days to be able to give that member the best or nearly the best price for those products relative to anybody else in the marketplace, again, because we have very low cost of acquisition and low cost to serve. So we can pass those savings on directly to our members, which I'm really excited about in terms of the value proposition of Marketplace for our members. So those are very, very big differences in this Marketplace versus a direct-to-consumer Marketplace that everybody else would be competing in.

Our next question today comes from Mark Marcon with Baird. Please go ahead.

I've got two. First, just on the cash balances, Scott or Jim, just wondering, in terms of the lower rate of growth, would you attribute that more to the cash balances being spent because of the higher cost of healthcare or more engagement with the marketplace, or is it an increase with regards to the investments and people becoming more savvy about using the investment assets? And along those lines, how would you think that cash balances will grow long-term relative to account growth? And then I've got a follow-up on the marketplace.

Yes, I mean, this is, I think, a deliberate reflection of our strategy, which is our strategy is driving greater lifetime value of our members through the activities that drive the greatest long-term value. And so when you look at the long-term value of becoming an investor as an example, we've highlighted this before that most investors have 4x the contribution level that a non-investor, non-spender would have. And so it's really important that we drive our members towards becoming investors and that for us, how we do that is a really streamlined and efficient frictionless experience in enrollment, and the results that we've seen on a year-over-year basis to be able to drive north of 20% growth in the number of investors, Mark, is an absolute reflection of that strategy. It does mean that initially that person becomes an investor and holds a lower potentially a lower cash balance. But again, over time, that investor will drive a greater cash balance growth over time. The other thing essentially is a flywheel to the business is driving spend. And I wouldn't say necessarily that the spend or marketplace yet is material enough to drive the overall averages of cash balances. But again, theoretically, what we're driving is as you spend on the account more, you also contribute more. And so marketplace is one component of that. And so again, as we think about that, Mark, is really just thinking about driving the long-term growth of the business, the long-term growth of the value of that member, but also having that member be way more engaged in the account than they would otherwise. And so I think that is, again, reflected as a really very deliberate strategy on our part to be able to drive that.

Got it. And then with regards to the marketplace, and it's a good segue, I thought you've got a lot of experience with regards to different marketplaces, obviously different consumer propositions, but just in terms of taking a look at the initial member engagement, what are you seeing in terms of conversions relative to people who are actually coming onto the site, exploring some of the different offerings within the marketplace, and then deciding to proceed? How does that compare to what you would expect? You know, and I know it was different categories, very different categories, but how's that going? And how much confidence do you have in terms of the future growth of the marketplace based on what you're seeing?

Yes, great question. Again, as we think about before you even get to conversion, you really need to be able to have a funnel. And the marketplace will operate in a slightly different funnel than other marketplaces that are, again, kind of to the prior question, typically driven top of funnel through marketing activities or spend or cost of acquisition to be able to drive that. For us, as we think about the future, Mark, we're moving towards a future where we have a single app experience. And that single app experience is really designed to empower our members to become consumers of healthcare. And when we think about that, that also starts with having an app experience and having an experience that is engaging. There's a reason to come back to. And that includes education, could include connection and integration with your health, maybe even how your investments are performing, how you can become more empowered. All of those activities in the app start at the top of funnel activities that ultimately, then when you can introduce Marketplace, can create that conversion opportunity. You know, I think how we compare, we're so early in the journey of actually creating a funnel that the compares aren't necessarily relevant right now. But again, as I look at conversion as an example, this is the single thing that I was most excited about in the quarter, which was our ability to drive conversion. For most marketplaces where this is your core business, conversion is the single metric that you look at in the experience. It is a reflection of your ability to drive a great experience, but actually then also convert your customer, your member, into the transaction experience you're trying to provide. And we made significant changes, improvements in conversion over the course of the last quarter. And the way you drive that is A/B testing. Test different treatments, test different exposures of offerings, more personalization, and we're able to do all that activity and have a tech organization that's really organized around that conversion opportunity, then we can really make this even more powerful. So that's why I say we're barely at the beginning of what Marketplace can become.

Our next question today comes from Steven Valiquette with Mizuho Securities. Please go ahead.

So I guess my question is regarding the custodial revenue growth of 10% in the quarter, just curious at a high level how to think about that growth and how it may trend directionally in the back half of the current fiscal year. On the one hand, you raised the full-year HSA cash yield guidance, which is obviously encouraging, and the five-year Treasury yield has moved up a lot, which is also positive. But without giving, I guess, specific guidance, is that 10% growth a reasonable run rate for custodial revenue growth for the back half, knowing that hedging activity may unfortunately be limiting some of the potential upside?

So don't give you specific guidance, but give you specific guidance is the question. So, yes, yes. So, I mean, you guys, you can do the math, right? Like, we can't really move this number for what you said, right? The cash is placed right now. And yes, the five-year moving is mostly irrelevant. Yes. And, like, yes, some things are going to reprice. A lot of it is hedged already. So that's why I said we have pretty good certainty plus or minus of what the yield is going to be for this year. And then we get a lot of the new cash in is from our clients seeding accounts in those payrolls of January. So we get a bunch of cash in towards the end of the year, and it doesn't get a chance to move the annual rate that much because it's just not in for long enough. And that's why that January is big about knowing with more precision what our yield is going to look like next year. So, you know, I can give you a nice tight 5 basis point band for '27. I would not be able to give you a tight 5 basis point band for next year, but a pretty tight band. So, just based on the quantum of cash placed relative to the new cash that's going to come in at market rates, as well as the balance of the hedges that we have on. So that's why you saw it last year too, right? Like the number just doesn't move that much once we get to this point in the year. The part that can move it up and down is the floating rate component and the balances that are not in fixed rate contracts. Like that's the at the margin plus or minus 5 basis points, and then the little bit that we're placing between now and year end that isn't hedged, that will float with the five-year Treasury. So that's the window that we're operating under.

The quick follow-up kind of tied to this would just be that with the five-year Treasury yield hanging around at higher levels at around 4.4%, are you slowing down the pace of your hedging activity in light of that, or are you just opportunistically locking in higher rates on the hedges now? Maybe a little bit of both, but just curious.

Yes, good question. So, obviously, like the near-term maturities, like, we're already hedged, right? So, the ship has sailed. As time goes on, the one thing that I announced in the prepared remarks was we did place our first hedge on an enhanced rates repricing. So, think of that as, like, these annual rate resets in enhanced rates, we were able to hedge a handful of those contracts to a certain extent. So that is a new innovation in our hedging program. So what you should expect is that will grow over time as we're able to, they're more complicated hedges than a simple basic rates maturity, like that's a bunch of cash maturing on one day, I need to hedge the five-year Treasury on one day. And enhanced rate contracts is a little more complex than that, but we stepped into that market post the quarter close. So you'll hear about that a little bit more next quarter. But as time goes on, we're reaching into the next year. So when we started this program, it was '27. Then we started hedging into '28. Now we've started hedging into '29. So the new hedges will continue and obviously, those enhanced rate hedges were placed at a five-year Treasury way higher than the 3.9% that we talked about for this quarter. So, yes, we're going to continue to mature the current hedges, and we're going to continue to add on new market rate hedges. So over time, you'll see the locked yield move up.

Our next question today comes from Ryan Halsted with RBC. Please go ahead.

Maybe just a two-parter on the strong new sales growth. Just any commentary on the competitive landscape, how your win rate has been trending or RFP trending. And then the second part is just, you mentioned in the capital allocation potentially being opportunistic. I mean, do you think you need to be strategic if you think you can just continue to take share at the rate you have been?

Thanks, Ryan. So on the new sales growth side, obviously this sales growth is significantly faster than growth in the industry, which again will reflect our leading position, but I think also a leading growth position in the marketplace. We obviously have a broad set of competitors, and as the market leader, we have to be more competitive than the rest of the industry. And where I see our strategy differentiating us relative to the competition is a couple of factors. Number one, go back to our mission. Save and improve lives by empowering healthcare consumers. That is our mission. We're not a bank. We're not a retirement company. We're really driving towards consumer empowerment. And so everything in the product experience, everything that we're going in terms of our engagement with our clients is really designed to do that. Number two, the actual experience that we deliver is also becoming more and more differentiated relative to the competition. As we look at, as an example, bringing together into that single app experience all of our products, education, marketplace, AI delivering improvements in terms of security in that posture, all of those things are also very differentiated relative to the competition. So again, in order for us to stay in front of them, I think we've got to differentiate across those points. Our retention rates are very high. Our win against our large competitors is also very, very strong. And, you know, and I think our pipeline of transactions across all companies and all sizes, given that we have the largest set of integrated plan partners also just gives me confidence that we'll continue to outpace growth in the industry in the quarters to come. And so I think that is our differentiated position and will continue to be that position. Just clarification on your second part, which is really just how capital allocation. I want to just make sure I'm answering that correctly. So what you had your capital allocation, which I think is a little bit different than the competition, but what was your second part to clarify?

Oh, sorry. Just in terms of maybe strategic opportunities, I thought you had mentioned in your capital allocation strategy keeping some dry powder. But, you know, my question was, do you feel like you can continue to grow and take share without having to be perhaps acquisitive?

Oh, okay. Yes, I mean, I think there's two parts to that. Number one is our overachievement in efficiencies, particularly driven on the service side, gives us this opportunity to lean into growth. And growth is really important for us. While we're continuing to deliver margin expansion and to be able to deliver our framework to the street, those growth initiatives that we're investing in, next-generation apps, leaning into AI, delivering on the experience. We talked about a little bit on the sales and marketing side. In addition to the renewals and the cycles of winning new logos, we're also building new retail muscle in that IFP market. And so we've been talking about leaning into that from a marketing perspective with a match as well as top of funnel marketing to be able to drive that type of adoption. And I'm really excited in just another month, we've got our largest customer summit focused on brokers and clients where we're bringing together a huge group to be able to talk about all the different things that we're doing. We've never done that before at that type of scale. So it's another, I would say capital allocation, but investment that we're able to make in the second half of the year. On real capital allocation, we want to be prepared for any M&A that comes available in the market, and we'll continue to have a high bar associated with that. We'll continue to pay down debt, we'll continue to be real efficient allocators of capital at the enterprise level. But I think, again, our performance as well as our expansion gives us the opportunity uniquely to really invest in this business to drive growth.

Our next question today comes from David Larsen at BTIG. Please go ahead.

This is Jenny Shen on for Dave. On the new app that you expect to launch in the coming months, can you just talk more about some of those key points that you highlighted? And is this a simple upgrade of the current app that you have, or is it an entirely new one for members? And then on the labor markets, I think you touched on it briefly in your prepared remarks, but anything to call out that you guys are seeing on your end in terms of employment and hiring trends?

Yes, so the app experience is two things. Number one, our HealthEquity app will be updated into this new next-generation app experience. And so all HealthEquity app users will effectively be upgraded as we roll that together. I also talked about one of our other apps is our reimbursement EZ Receipts app. That app will be integrated into the HealthEquity experience. That will come together as a single experience. So think of that as most of our FSA accounts, as an example, will come into the single HealthEquity app where we'll be able to have all of your, again, claim reimbursement to marketplace activity, to investment activity, to education, all in a single integrated experience. And so that bringing together is something that is new for us. And so we're going to be driving that over the coming months. On your second question relative to the labor markets, of course, we do look at the labor statistics and new jobs that are being added into the marketplace. I think as we talked about in prior years and in quarters is that we are not tied to the strength or the weakness in the labor markets. Last year, we put up a record number of new HSAs against a very weak macro labor market. The macro labor market is better than expected so far this year. But again, the reason that we're not dependent on that is because of the challenge associated with healthcare affordability and our ability to drive greater adoption, which again is represented by what you see in the new HSA growth where the growth from our existing client base, again, likely overcomes any of some of that either macro weakness. And so I think, again, what we see is really just growth in the value proposition of the accounts, which, again, has been tremendous in a year, certainly in the beginning of the year, where there might have been questions around that or questions relative to our ability to drive outsized growth. I think we've proven that now in several quarters in a row, that we're able to grow this business and grow our accounts disconnected from the overall labor market.

That concludes our question and answer session. I'd like to turn the conference back over to the company for any closing remarks.

All right, thanks everybody. Really great and thoughtful questions. We really appreciate your support. Again, to kind of wrap it up, really pleased with the execution in Q2. Hopefully you felt the message reinforcing the strength and durability of our model and our increased confidence in the long-term value creation opportunity ahead. So again, thanks for your interest and support. We look forward to updating you next quarter.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.